The road to Utopia is the road to Hell. — Communism and socialism are the opiates of the intelligentsia. — The left, in its eternal and futile quest for "equality", is more than willing to abolish liberty and sunder fraternity.

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Tag Archives: CAPE-10

Robert Shiller‘s most famous (or infamous) book, is Irrational Exuberance (2000). According to the Wikipediaarticle about the book,

the text put forth several arguments demonstrating how the stock markets were overvalued at the time. The stock market collapse of 2000 happened the exact month of the book’s publication.

The second edition of Irrational Exuberance was published in 2005 and was updated to cover the housing bubble. Shiller wrote that the real estate bubble might soon burst, and he supported his claim by showing that median home prices were six to nine times greater than median income in some areas of the country. He also showed that home prices, when adjusted for inflation, have produced very modest returns of less than 1% per year. Housing prices peaked in 2006 and the housing bubble burst in 2007 and 2008, an event partially responsible for the Worldwide recession of 2008-2009.

However, as the Wikipedia article notes,

some economists … challenge the predictive power of Shiller’s publication. Eugene Fama, the Robert R. McCormick Distinguished Service Professor of Finance at The University of Chicago and co-recipient with Shiller of the 2013 Nobel Prize in Economics, has written that Shiller “has been consistently pessimistic about prices,”[ so given a long enough horizon, Shiller is bound to be able to claim that he has foreseen any given crisis.

(A stopped watch is right twice a day, but wrong 99.9 percent of the time if read to the nearest minute. I also predicted the collapse of 2000, but four years too soon.)

One of the tools used by Shiller is a cyclically-adjusted price-to-earnings ratio known as CAPE-10 . It is

a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten [previous] years of earnings … , adjusted for inflation. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns.

CAPE-10, like other economic indicators of which I know, is a crude tool:

For example, the annualized real rate of price growth for the S&P Composite Index from October 2003 to October 2018 was 4.6 percent. The value of CAPE-10 in October 2003 was 25.68. According to the equation in the graph (which includes the period from October 2003 through October 2018), the real rate of price growth should have been -0.6 percent. The actual rate is at the upper end of the wide range of uncertainty around the estimate.

Even a seemingly more robust relationship yields poor results. Consider this one:

The equation in this graph produces a slightly better but still terrible estimate: price growth of -0.2 percent over the 15 years ending in October 2018.

If you put stock (pun intended) in the kinds of relationships depicted above, you should expect real growth in the S&P Composite Index to be zero for the next 15 years — plus or minus about 6 percentage points. It’s the plus or minus that matters — a lot — and the equations don’t help you one bit.

As the Danish proverb says, it is difficult to make predictions, especially about the future.

Comments & Correspondence

Comments close 30 days after the publication of a post. If a post is no longer open for comment, or if you prefer to communicate privately, you may e-mail me at the Germanic nickname for Friedrich followed by the last name of the great Austrian economist and Nobel laureate whose first name is Friedrich followed by the 3rd and 4th digits of his birth year followed by the usual typographic symbol followed by the domain and extension for Google’s e-mail service — all run together.

If you submit a comment or suggestion by e-mail, I may acknowledge it or use it on this blog. But I may paraphrase what you say or edit it for the sake of concision, clarity, coherence, or brevity. I will not use your name unless you specifically authorize me to do so. Even then, I will put quotation marks around your name unless I am certain of your identity.

On Liberty and Libertarianism

What is liberty? It is peaceful, willing coexistence and its concomitant: beneficially cooperative behavior.

John Stuart Mill opined that "the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others." But who determines whether an act is harmful or harmless? Acts deemed harmless by an individual are not harmless if they subvert the societal bonds of trust and self-restraint upon which liberty itself depends.

Which is not to say that all social regimes are regimes of liberty. Liberty requires voice -- the freedom to dissent -- and exit -- the freedom to choose one's neighbors and associates. Voice and exit depend, in turn, on the rule of law under a minimal state.

Liberty, because it is a social phenomenon and not an innate condition of humanity, must be won and preserved by an unflinching defense of a polity that fosters liberty through its norms, and the swift and certain administration of justice within that polity. The governments in and of the United States have long since ceased to foster liberty, but most Americans are captives in their own land and have no choice but to strive for the restoration of liberty, or something closer to it.

Who can restore liberty? Certainly not the self-proclaimed libertarians who are fixated on Mill's empty harm principle and align with the left on social norms. Traditional (i.e., Burkean) conservatism fosters the preservation and adherence of beneficial norms (e.g., the last six of the Ten Commandments). Thus, by necessity, the only true libertarianism is found in traditional conservatism. I am a traditional conservative, which makes me a libertarian -- a true one.

Notes about Usage

“State” (with a capital “S”) refers to one of the United States, and “States” refers to two or more of them. “State” and “States,” thus used, are proper nouns because they refer to a unique entity or entities: one or more of the United States, the union of which, under the terms and conditions stated in the Constitution, is the raison d’être for the nation. I reserve the uncapitalized word “state” for a government, or hierarchy of them, which exerts a monopoly of force within its boundaries.

Marriage, in the Western tradition, predates the state and legitimates the union of one man and one woman. As such, it is an institution that is vital to civil society and therefore to the enjoyment of liberty. The recognition of a more-or-less permanent homosexual pairing as a kind of marriage is both ill-advised and illegitimate. Such an arrangement is therefore a “marriage” (in quotation marks) or, more accurately, a homosexual cohabitation contract (HCC).

The words “liberal”, “progressive”, and their variants are usually enclosed in quotation marks (sneer quotes) because they refer to persons and movements whose statist policies are, in fact, destructive of liberty and progress. I sometimes italicize the words, just to reduce visual clutter.

I have reverted to the British style of punctuating in-line quotations, which I followed 40 years ago when I published a weekly newspaper. The British style is to enclose within quotation marks only (a) the punctuation that appears in quoted text or (b) the title of a work (e.g., a blog post) that is usually placed within quotation marks.

I have reverted because of the confusion and unsightliness caused by the American style. It calls for the placement of periods and commas within quotation marks, even if the periods and commas don’t occur in the quoted material or title. Also, if there is a question mark at the end of quoted material, it replaces the comma or period that might otherwise be placed there.

If I had continued to follow American style, I would have ended a sentence in a recent post with this:

What a hodge-podge. There’s no comma between the first two entries, and the sentence ends with an inappropriate question mark. With two titles ending in question marks, there was no way for me to avoid a series in which a comma is lacking. I could have avoided the sentence-ending question mark by recasting the list, but the items are listed chronologically, which is how they should be read.

This not only eliminates the hodge-podge, but is also more logical and accurate. All items are separated by commas, commas aren’t displaced by question marks, and the declarative sentence ends with a period instead of a question mark.